ICAZ CTA TAXATION TUTORIAL 102: PRESENTED BY · PDF fileICAZ CTA TAXATION TUTORIAL 102:...

ICAZ CTA TAXATION TUTORIAL 102: PRESENTED BY CAA 2016

of 70 FOR ICAZ 2016 CTA EXAMS Property of CAA Learning Media

TEST 2: 26 APRIL 2015

Personnel Telephone Number

Lecturers

Elliot Wonenyika +263 4 702532/5

Zvinotendesa Mapetere +263 4 702532/5

Tests TIMETABLE

Scope Test Number Test date

Tutorial 1 Test 1 15 March 2016

Tutorial 2 Test 2 26 April 2016

Tutorial 3 Test 3 21 June 2016

Tutorial 4 Test 4 02 August 2016

Study Units in module covered in this tutorial letter

Study Unit D

Study Unit E

Study Unit H

Study Unit I



PRESCRIBED METHOD OF STUDY

1. Please read the prescribed study material for every study unit thoroughly before you study the additional information in section A of every study unit.

2. Do the other questions (section B) in the study unit and make sure you understand the principles contained in the questions.

3. Consider whether you have achieved the specific outcomes of the study unit. 4. After completion of all the study units - attempt the self-assessment questions to

test whether you have mastered the contents of this tutorial letter.



SELF ASSESSMENT INTEGRATED QUESTIONS

Question

Number

Topics Covered Source Marks Page

number

1 Calculation of tax payable on business

income – capital allowances, share options,

provisions, leases, prepayment

50

2 Calculation of taxable income

from business income –

dividends, recoupments, capital

allowances, thin capitalisation,

provisions

18

ICAZ ITC

June 2013

18

3 Calculation of tax payable on

business income

25

CAA MY

2014

25

4 Journal entries – machinery

imported

10

Discussion questions: Capital

allowances, employment

benefits, leases

30

CAA MY

2014

40

5 Income tax advice on various

transactions.

20

Lease treatment in the hands of

the lessee

6

Lease treatment in the hands of

the lessor

4

CAA 2014 30

6 Calculation of amounts payable

on the QPDs

4

Calculation of tax payable on

business income

20

CAA Test 2

2015

28



Advice on treatment of assessed

losses

4

7 Calculation of tax payable on

business income

25

Discussion of tax implication of a

lease in the hands of the lessor

5

CAA MY

2015

30

8 Calculation of Partnership joint

taxable income

8

Calculation of tax payable by

individual partners

7

CAA MY

2015

15

9 Calculation of Partners’ Tax Liability CAA MY

2014

30

10 Calculation of Tax from Business Income

and case law

ICAZ

Adapted, ITC

Jan 2011

Paper 4

Question 2

27



Question 8

Newwave Ltd (Newwave) manufactures electronic cigarettes. This is a new concept of cigarettes that was invented by the major shareholder and CEO of Newwave. The company was listed on the Zimbabwe Stock Exchange in 2009 as it hoped to raise more equity after its entire share capital was wiped out when Zimbabwe changed from Zimbabwe dollars to adopt multi-currency. The electronic cigarettes are odourless, ash free and do not need a lighter. Newwave manufactures in its own factory situated in Southerton Industrial Area. The manufacture of the cigarettes is regarded as a manufacturing process by the Zimbabwe Revenue Authority (ZIMRA). Newwave’s financial year ends on 31 March each year. Its 2012 annual financial statements, which include the effects of the journal entries below, reflect profit before tax of $5 340 500. The amounts exclude VAT where applicable. In preparation of its annual financial statements a number of unrelated journal entries were made, some of which were as follows: 1 Investment in rent-producing property

Dr Cr Investment property 250 000 Income statement (fair value adjustment) 250 000 Investment in a property valued at its fair value in terms of IAS 40,

Explanation: Newwave participated in the government project to encourage companies to

invest in building residential accommodation to ease accommodation woes under the operation titled ‘Operation Garikai’. In 2010 it purchased land and built cluster houses in Greendale. The houses where finished and brought into use on 1 April 2011 at a total cost of $750 000. The cluster houses are subject to an annual fair value adjustment. On 31 March 2012 the fair value was $1 000 000.

Dr Cr Bank 48 000 Income statement (rental) 16 000 Income received in advance (accounts payable) 32 000 Rental received for six months, of which four months are in advance

Explanation: Newwave lets the property at a market-related rental. The tenants paid $48

000 to Newwave on 3 February 2012, being rental for the six-month period 1 February 2012 to 31 July 2012. The rental for the four months that fall in its 2013 financial year has been included in Newwave’s accounts payable.

2 Investment in ‘local’ listed shares

Dr Cr Investment in a ‘local’ listed company 180 000 Bank 180

000 Investment in a ‘local’ listed company Fair Value adjustment – Income Statement 11 000 Investment in a ‘local’ listed company 11 000 Investment in a ‘local’ listed company restated at its fair value



Explanation: On 1 September 2011 Newwave purchased shares in Econet, a ‘local’ listed company as an investment for $180 000. Newwave does not deal in shares.

On 31 March 2012 the fair value of this investment was $169 000. In accordance with IFRS 9,

Financial Instruments, Newwave classified this investment as ‘at fair value through Profit and Loss’.

Dr Cr Bank 16 000 Income statement (sundry income: ‘local’ dividend) 16 000 ‘Local’ dividend received from its investment in the ‘local’ listed company

Explanation: On 31 January 2012 Newwave received a ‘local’ dividend of $16 000 from its

investment in Econet. This was the only dividend that accrued to it in its 2012 financial year in the profit and loss.

3 Capitalised finance lease

Dr Cr Computer 300 000 VAT input account 42 000 Lease liability 342

000 Computer purchased under a finance lease Lease liability 130 000 Bank 130

000 Settlement of the first annual lease rental under the finance lease in advance

Income statement (finance charges) 2 607 Lease liability 2 607 Interest for one month (to 31 March 2012) calculated as follows:

($342 000 - $130 000) x 14,756% x 1/12 Income statement (depreciation) 5 000 Accumulated depreciation 5 000 Depreciation on the computer for the 2012 financial year calculated as follows: $300 000 x 20% x 1/12

Explanation: On 1 March 2012 Newwave leased a computer for a three-year period at a lease

rental of $130 000 per annum payable annually in advance. Newwave capitalised this finance lease in its accounting records. The lease agreement reflects a cash cost for the computer of $300 000, VAT of $42 000 and finance charges of $48 000. On 1 February 2012 Newwave Ltd paid its first annual rental of $130 000. ZIMRA allows a special initial allowance of 25% p.a



4 Impaired plant

Dr Cr Income statement (depreciation) 30 000 Accumulated depreciation 30 000 Depreciation on the plastic bottle plant at 20% per annum on the straight-line basis

Income statement (impairment loss) 25 000 Accumulated impairment 25 000 The plastic bottle plant reflected at its recoverable amount

Explanation: Newwave used to sell its cigarettes in plastic cases, but stopped doing so in

order to comply with environmental requirements. The plant that was used to package plastic cases with cigarettes is now only used occasionally, and solely for special export orders.

Because of the decline in popularity of plastic cases the value of this plant has also declined.

After provision for depreciation of $30 000 for its 2012 financial year, the carrying amount of the plant was $60 000. It originally cost $150 000 (excluding VAT) and depreciation has been provided at a rate of 20% per annum on the straight-line basis. The asset was acquired, brand new, on 1 March 2009 and it qualified for the special initial allowance from that date at 50%, and 25% wear and tear thereafter. Its market value is now $35 000, which is both its scrap value and the recoverable amount. To reduce the value in the financial statements to the recoverable amount, an impairment loss of $25 000 was charged to the income statement.

5 New plant

Dr Cr Plant 750 000 Bank 750

000 Purchase on 1 September 2011 of a tablet-making plant Income statement (depreciation) 75 000 Accumulated depreciation 75 000 Depreciation on the tablet-making plant at 20% for the 2012 financial year calculated as follows: $750 000 x 20% x 6/12

Explanation: Newwave now also sells its cigarettes in biodegradable paper cases, which

necessitated the purchase of plant to package the cigarettes in those cases. Newwave purchased a new and unused packaging plant on 1 October 2011 which was immediately brought into use.



6 Defined benefit pension fund

Dr Cr Defined benefit pension net liability 432 000 Bank 432 000 The contribution of Newwave (as the employer) to the pension fund

Income statement (defined benefit pension expense) 253 000 Defined benefit pension liability 253 000 The charge for the net pension expense to the income statement for the 2012 financial year. This amount was determined as follows: $ Current service costs 225 000 Plus: Interest cost on pension obligation 610 000 835 000 Less: Interest on pension plan assets (570 000) 265 000 Less: Decrease in past services costs (12 000) Charge to income statement 253 000

Explanation: Newwave employees contribute 6% of their salaries to the company’s pension

fund, while the company contributes on the basis of $2 for each $1 contributed by an employee, which in effect means that the company contributes 12% of the value of employees’ salaries to the pension fund which is all deductible for tax purposes.

Newwave has a defined benefit fund. At the end of the company’s financial year an actuary

determines the pension fund assets and liabilities. Newwave provides for a defined benefit pension liability in terms of IAS 19, Employee benefits. On 1 March 2011 the balance of its defined benefit pension liability was $1 000 000, and benefits of $400 000 were paid out by the fund during the year.

7. Prepaid expenses

Dr Cr Prepaid expenses (balance sheet) 60 000 Income statement (insurance) 40 000 Income statement (property rates) 15 000 Income statement (Medical Council levy) 5 000 The portion of the above expenses that relates to its 2013 financial year

Explanation: Newwave pays the insurance premium on its business assets, the property rates

for its trade premises and a levy to the Medical Council annually in advance.

Amount paid (excluding

VAT)

Date Paid

Period covered

Insurance premium $60 000 29 Nov 2011 1 Dec 2011 to 30 Nov 2012

Property rates $18 000 24 Jan 2012 1 Feb 2012 to 31 Jan 2013 Levy to the Medical Council $12 000 27 Aug 2012 1 Sept 2011 to 30 Aug

2012



There were no prepaid expenses at 31 March 2011. 8 Doubtful debts

Dr Cr Income statement (increase in the provision for doubtful debts and bad debts written off)

9 000

Provision for doubtful debts Accounts receivables

8 000 1 000

The adjustment to increase the provision for doubtful debts from $34 000 to $42 000 and $1 000 for bad debts written off during the year

Explanation: Relates to provision for doubtful debts and bad debts written off. The

accountant is unsure whether ZIMRA will give him a deduction in respect of the amounts. 9 Bad debt

Dr Cr Income statement (bad debt expense) 27 200 Loan to employee 27 200 The amount owing by an employee, Mr Ghana, written off as a bad debt

Explanation: Newwave is not a moneylender, but on 1 March 2009 lent $20 000 to an

employee, Mr Ghana, to partly finance his study expenses. The loan was at an interest rate of 12% per year. However, Mr Ghana has for the past three years neither repaid any portion of this loan nor any of the interest due. It is clear that he will not be able to repay any of the amount owing and the company has therefore decided to write off the amount of the loan as well as the interest as a bad debt.

10 Cottages for employees

Dr Cr Buildings (ten cottages) 1 500 000 Bank 1 500 000 The erection of ten cottages at $150 000 each Bank 1 500 000 Debentures 1 500 000 Funds borrowed to pay for cottages Buildings (borrowing costs on the ten cottages capitalised) 67 500 Bank 67 500 The debenture interest for the first six months Buildings (borrowing costs on the ten cottages capitalised) 22 500 Income statement (interest incurred) 45 000 Bank 67 500 The debenture interest for the second six months Income statement (depreciation of buildings) 26 500 Accumulated depreciation on buildings 26 500 Depreciation on these buildings provided for in terms of IAS 16, Property, plant and equipment, and calculated as follows: ($1 500 000 + $67 500 + $22 500) x 5% x 4/12

Explanation: On 1 April 2011 Newwave commenced with the erection of ten cottages (ten

dwellings) on its own premises. These cottages were completed at a cost of $150 000 each on 30 November 2011. They were occupied rent-free by ten of its employees as from



1 December 2011. To finance the entire cost of the cottages, Newwave issued 9% debentures on 1 April 2011. Interest on the debentures is payable six monthly.

11 Share options

Dr Cr Income statement (staff costs - share options) 37 500 Equity (share options) 37 500 The cost of the equity settled options of the third and final year of the vesting period recognised as follows:

(50 x 1 000 x $3) – 112 500 = $37 500 Previously recognised as follows: up to 28 February 2011 (50 x 1 000 x $3 x 27/36) = $112 500 Loan to employees 500 000 Equity (share options) 150 000 Share capital 50 000 Share premium 600 000 500 000 shares with a nominal value of $1 each issued to employees in terms of the share option scheme

Dr Cr Loan to employees 20 000 Income statement (interest accrued) 20 000 Interest accrued on the loan to employees at a rate equal to the dividend declared

Explanation: On 1 January 2007 Newwave granted share options to 50 of its employees,

enabling each of them to purchase 1 000 Newwave shares at $10 a share. The par value of a Newwave share is $1. Each option had a fair value of $3 on the grant date.

Each grant is conditional on the employee remaining in the employ of the company until 31 December 2011. During its 2009, 2010 and 2011 financial years it was estimated that no employee would leave Newwave’s employ before the vesting date (31 December 2011). Indeed, all 50 employees were still employed on 31 December 2011 and exercised their options on this date. The value of a Newwave share was then $16. In terms of the articles of association of the company, the employees are not entitled to continue to hold the shares after they cease to be employed by the company.

Newwave granted loans of $10 000 each to the employees for the purchase of the shares.

The loans bear interest at a rate equal to the dividend that accrued to the employee. On 29 February 2012 a dividend of $400 accrued to each of the 50 employees which was offset as interest on the loan.



12 Provisions

Dr Cr Factory Building 180 000 Provision for Environmental Rehabilitation 180 000 Provision for environmental rehabilitation at the area of the main cigarette processing plant

Depreciation 6 750 Accumulated Depreciation 6750 ($180 000/20 x 9/12)

Dr Cr Provision (Income Statement) 20 000 Provision for Environmental Rehabilitation 20 000 ($180000x11%*9/12)

Explanation: During the year new legislation requiring companies that dispose of toxic waste

in the environment to ensure that the environment has been restored to its original conditions. The new legislation came into effect on 1 July 2011. Newwave, in its main location, produces a filtered toxic substance from the manufacture of cigarettes. When they started operating the plant, the company had not invested in the combustion machinery that breaks up the toxic substance into a detoxed form; some of the substance was dumped behind the main factory. Environmental experts engaged during the year have provided the estimate of the amount needed to rehabilitate the environment and the amount has been discounted correctly at 11% to $180 000. The useful life of the plant has been estimated to be 20 years. All capital allowances on the factory building had been fully claimed in prior years.

13 Other Journals

Dr Cr Commission Expense 500 000 Bank 500 000 Commission paid to a government official who helped the company avoid censure by government over its non-compliance with the Indigenisation and Empowerment Act

Fines 24 000 Bank 24 000 Fines paid to Environmental Management Agency (EMA), due to unlawful dumping of expired products

Dr Cr Legal Fees 20 000 Bank 20 000

Explanation: Mr Kitsu, the CEO and major shareholder, is Ghanaian. The company was listed in the initial list that came out in the government gazette for companies that needed to comply with the Indigenisation and Empowerment Regulations. After a series of meetings with some influential government officials, the company was taken off the list. However a commission was paid to some officials for their effort to ensure the company was removed from the list.



The amount for fines relates to amounts charged by EMA when the company’s truck driver was caught at night dumping expired products in an undesignated place.

Legal fees were paid for a case that is still on-going against ZIMRA as a result of an allegation by ZIMRA of understating its tax payable from 2009 to 2011 by $1 000 000. The amount of $2 500 000, which is the potential liability if the company loses the case, (being $1 000 000 for the understated tax, $1 000 000 for penalty and $500 000 for interest) has been disclosed in the notes.

Required

Calculate the taxable income of Newwave for its financial year ended 31 March 2012. Start with profit before tax of $5 340 500. Support your answer with workings and reasons.

CAA CTA JUNE 2013



Question 1 Solution

Q 1 Calculation of taxable income $ Net income per income statement 5 340 500 1 Investment in rent-producing property Less fair value adjustment (gain) in investment property (no receipt or accrual, so not gross income)

(250 000)

2

Less W&T – (2.5% x 750 000) – 4th Schedule Para 2(commercial building)

(18 750) 2

Add rentals received in advance (a receipt, so included in gross income)

32 000 2

Investment in local listed shares

Add back fair value adjustment through profit and loss (no loss or expense actually incurred)

11 000

1

Less ‘local’ dividend - 3rd Schedule Para 9 (16 000) 2 Capitalised finance lease

Add back finance charges (accounting provision) 2 607 1 (reversal of accounting treatment as only lease payments are allowed for tax purposes)

Add back depreciation (accounting provision) 5 000 1 Less lease rentals incurred adjusted for input tax (100/115 X 130 000) – Sect 15(2)(d)

(113 043) 2

Impaired plant

Add back depreciation (accounting provision) 30 000 1 Add back impairment loss (accounting provision) 25 000 1 Accelerated Wear and tear (25% x 150 000) (37 500) 1 New plant

Add back depreciation (accounting provision) 75 000 1 Less SIA allowance: $750 000 x 25% (187 500) 1 Defined benefits pension fund

Add back pension charge to income statement (no expense or loss actually incurred)

253 000

2

Deduction for the employer’s pension fund contribution (432 000) 2 Prepaid expenses

Insurance (40 000) 1



$ Rates

(15000)

1

Medical Council levy (5 000) 1 Doubtful debts – Section 15(2) (g) Add back provision for doubtful debts (accounting entry) Bad debts (Allowed – no adjustment)

8 000 -

1 1

Bad debt – Section 15(2)(g) Add back ‘capital’ portion of the debt owing by Mr Ghana. New Wave Ltd is not a moneylender and the $20 000 never formed part of its income. However, as the interest of $7 200 was included in New Wave Ltd’s income, it is tax deductible

20 000

2 Cottages for employees Add back depreciation on buildings (accounting entry) 26 500 1 Residential units disqualified for capital allowances since construction of each unit exceeds $25 000

-

2

Issue of debentures (receipt of a capital nature) - no adjustment required

- 1

The debenture interest including the pre-production portion is tax deductible. So a further $90 000 is deductible

(90 000)

1

Interest on debentures (no adjustment necessary) - 1 Share options

Interest accrued on loans to employees forms part of New Wave Ltd.’s gross income and therefore no adjustment is required

-

2

Add back provision for equity (no expense or loss actually incurred) 37 500 2 Increase in share capital and share premium (receipt of a capital nature) - no adjustments required

-

2

Provisions Add back depreciation 6 750 1 Add back provision – no incurred 20 000 1 Other Journals Commission - not incurred for the purpose of trade 500 000 1 Fines 24 000 1 Legal Fees 20 000 1 Taxable income 5 232 064 1c

Tax and Aids levy at 25.75% 1 347 256 2 Income after tax Presentation

2



Question 2

Marble Arch Hardware (Pvt) Ltd (MAH), a company registered in Zimbabwe, deals in tools, hardware and building supplies. It also owns a residential property, which is let, as well as shares in listed companies, which are held as investments.

Throughout the 2012 financial year its share capital consisted of 100 shares of $10 each, which was held as follows:

% $ Cabriole Ltd (an unlisted company registered in the United Kingdom) 60 600 Mr Dayle Chippen (ordinarily resident in Zimbabwe) 20 200 Camelback Trust (a Zimbabwean Trust) 15 150 Ms Sofia Bridgewater (a resident in Canada) 5 50

100 Issued share capital 1 000 Retained profit at 31 December 2012 11 200 Equity at 31 December 2012 12 200

MAH had borrowed $40 000 from Cabriole Ltd ('Cabriole') at a rate of 10%. The interest had been credited to Cabriole's account in MAH's books at 31 December 2012. The agreement had been authorized by Exchange Control.

MAH accrued management fees payable to Cabriole amounting to $36 010, being 2% of gross profit. This had been credited to Cabriole's account at 31 December 2012. The agreement to pay a fee had been authorized by Exchange Control.

In November 2012 MAH declared a dividend of $60 000 after obtaining the relevant Exchange Control authorization.

MAH has prepared the following Profit and Loss Account for the 2012 year:



MARBLE ARCH HARDWARE (PVT) LTD PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2012

$ $ $ Gross profit from trading account 1 800 500 Rental income 7 000 Dividends from quoted Zimbabwe shares 2 510 Profit on sale of residential house 36 000

1 846 010 Expenses Agent's commission on sale of property 8 750 Entertainment

Staff Christmas party 1 760 Allowance to Managing Director 630 Lunch for customers 360

2 750 Interest

Cabriole 4 000 Zimbabwe Revenue Authority late payment of tax .680

4 680 Leqal expenses on sale of property 420 PAYE penalties 3 500 Payment to ACME Ltd to become sole agents for their

Tools 5 600 Partitions erected in office 2 920 Provisions

Specific provision for doubtful debts 2 400 Specific provision for leave pay 5 100 Provision for anticipated repairs 3 100

10 600 Other expenses - all allowable 1 769 580

1 808 800 Administration fee 36 010

1 844 810 Net profit 1 200

MAH sold the residential property on 5 August 2012 for $87 500. The property had been acquired in February 2006 for the equivalent of U$51 500.

During the 2012 year MAH purchased a second-hand twin cab for $19 000 and a Fiscalised register for $2 000.



Withholding taxes in terms of Double Tax Agreements

NRST

Country (Unlisted shares) NRT Fees NRT

Excluding directors'

royalty

Normal Reduced fees % % % %

Canada 15 10* 10 10

United Kingdom 15 5* 10 10

* Reduced where the recipient is a company beneficially owning at least 25% of the company distributing the dividend.

Required

Prepare an income tax computation for MAH for the year ended 31 December 2012,

commencing with net profit of$1 200. Where necessary motivate your answer. You are not

required to calculate any income tax payable.

ICAZ ITC JUNE 2013



Question 2 Solution

MAH – Income Tax Computation $ $ Marks

Net profit 1,200 ½

Dividend from Zimbabwe quoted shares – exempt 3rd schedule

(2,510)

1

Profit from sale of residential house – capital in nature

(36,000)

1 Recoupment: No capital allowances had been granted in US$ therefore no recoupment

0

1

Agent’s commission – Capital in nature since it was incurred towards the disposal of property 8,750

1

Staff Christmas party – treated as a staff cost - deductible 0 1

Allowance to Managing director – disallowed sect 16 630 ½

Lunch for customers - Prohibited deduction (sect 16) 360 ½

Interest : Thin capitalisation 16 (1) (q)

Paid

4,000

Allowable Portion * (3/3.29 * $4,000)

(3,647)

Disallowed Portion

353 353

2 Current debt to equity ratio: $40,000 : $12,200 3,29 : 1 Allowable portion is restricted to a debt to equity ratio of 3:1

Interest: ZIMRA Late payment of tax – prohibited sect 16

680

½ Legal expenses on sale of property – capital in nature 420 1

PAYE Penalties – Prohibited sect 16 3,500 ½

Payment to ACME Ltd – Capital in nature – prohibited sect 16 5,600 1

Partitions erected in office – Capital in nature 2,920 1 Provisions : Doubtful debts provision – not deductible, on actual bad debts are deductible

2,400

1

Leave pay provision – not cash outflow 5,100 1 Provision for anticipated repairs – no deduction allowable in respect of future expenses

3,100

1

Capital Allowance

Second Hand Twin Cab – Passenger motor vehicle ($10,000 * 25%) (2,500) 1

Fiscalised register - SIA ($2,000 * 50% * 25%) (250) 1

Partitions erected in office (commercial building) – ($2,920 * 2.5%) (73) 1

Tax loss (6 320)



Question 3

Zuva Cards (Pvt) Ltd (Zuva) is a company resident in Zimbabwe. It designs and manufactures cards that

are collected by children and sells these cards to producers of breakfast cereals and snack foods. Its

financial year ends on the last day of December each year.

The issued ordinary share capital of Zuva was held as follows throughout the 2013 financial year:

40% by Yugi Yuglyo, a resident of Armenia, a country with which South Africa does not have a

double tax agreement;

30% by Tinotenda Moyo, a resident of Zimbabwe;

20% by Tyson James, a resident of Zimbabwe;

and 10% by Max Mapako, a resident of Zimbabwe.

These four shareholders were also the sole directors of Zuva during the 2013 financial year. Tinotenda

Moyo is its managing director. Tinotenda Moyo, Tyson James and Max Mapako are all full-time employees

and executive directors of Zuva and as such they receive salaries from the company. Yugi Yuglyo is a non-

executive director. All four directors also earn fees for attending directors ‘meetings. The meetings are

held in Zimbabwe. Directors ‘salaries and fees are included in the amount stated under the heading

―Salaries, wages and benefits‖ in the detailed income statement.

Yugi Yuglyo lent Zuva the equivalent of $65 000 on 30 June 2011. The funds were made available to Zuva

in Armenia. Zuva transferred the funds to Zimbabwe in July 2011 for use in its business. This loan is

denominated in United States Dollars and has no fixed terms of repayment. It bore interest at a rate of

18% throughout the 2013 financial year of Zuva, but no portion was repaid during this period.

(It should be noted that all amounts reflected in the detailed statement of comprehensive income below

and in the notes that follow on it, exclude value-added tax (VAT) where appropriate unless specifically

stated to the contrary. Zuva is registered as an operator for VAT purposes.)

The detailed draft statement of comprehensive income of Zuva for the year ended 31 December 2013 is

set out on the next page:



Notes $ $

Sales 1 625 000

Less: Cost of sales (1 250 000)

Opening stock (152 500)

Purchases 1 (1 157 500)

(1 310 000)

Less: Closing stock 1 60 000

Gross Profit 375 000

Add Sundry Income 20 986

Dividend income 2 2 900

Capital profit on sale of local shares 3 8 000

Insurance settlement received 4 2 736

Prescribed debt 5 600

Profit on sale of machine A 11 6 750

395 986

Less: Expenditure (380 986)

Bad debts 6 4 500

Increase in provision for doubtful debts 7 600

Depreciation on motor vehicle 8 3 705

Depreciation on computer 9 570

Finance charges 10 220

Depreciation on machine A 11 1 250

Depreciation on machine B 11 1 875

Depreciation on other machinery and

depreciable assets 12 8 625

Rentals 13 6 750

Insurance premiums 14 8 100

Salaries, wages and benefits 15 290 000

Restraint of trade 16 33 600

Provision for leave pay 17 950

Interest 18 11 700

Cost of trade mark written off 19 4 000

Other tax-deductible administrative and

Marketing expenses 4 541

Comprehensive income (Net profit) before tax 15 000

Additional notes

1. On 1 December 2013, Zuva concluded a contract to import raw materials from an American supplier

at a cost of $24 000. The raw materials were shipped free on board on 22 December 2013 but had



not arrived in Zimbabwe by 31 December 2013. The creditor is to be settled on 31 January 2014.

Zuva did not, in its 2013 financial year, process any accounting entries relating to any of these

transactions.

Additional notes - continued

2. The following dividends accrued to Zuva during the 2013 year of assessment:

$

Dividends from resident companies operating in Zimbabwe that

accrued to Zuva during the period January 2013 to October 2013.

The shareholding of Zuva in these companies is in all cases less than 50% 2 020

A distribution from a collective investment scheme in property.

This distribution comprises interest of $880 880

Total 2 900

3. During the 2013 year of assessment Zuva disposed of only the following capital assets:

Disposal of some of its share investments at a capital profit of $5 500 (as determined in

accordance with the Capital Gains Tax Act). The related accounting profit is $8 000.

Sale (trade-in) on 31 August 2013 of machine A (see note 11).

4. A road freight contractor had collected an order of cards (trading stock) Zuvas’ premises for delivery

to a customer. On its way to its destination the road freight contractor ‘s delivery van, along with Zuva’

trading stock, was stolen. On 15 December 2013 Zuva was awarded an insurance settlement from its

insurer of $2 736 for the stolen trading stock. This amount does not take any possible VAT adjustment

that may have to be taken into account. You can assume that no accounting entry was made to record

the sale of the trading stock or the write of thereof as a result of the theft.

5. During the 2011 year of assessment Zuva had purchased raw materials for $1 500, excluding VAT,

from a manufacturer that was closing down. Zuva paid $900 (being 60% of the purchase

consideration) on the date of delivery. For the following three years it tried unsuccessfully to pay the

40% balance of the purchase consideration ($600). Every cheque posted was returned with ―address

no longer valid‖ endorsed on it. Because the debt has now prescribed, the amount owing has been

written back in its detailed draft statement of comprehensive income.

6. Bad debts written off of $4 500 consist of $1 800 for trade debtors and a loan of $2 700 to a supplier

who has been liquidated. This loan came about during the 2012 financial year of Zuva, when it lent $2

700 to a raw material supplier who was experiencing liquidity problems. The sup-plier was liquidated

on 1 December 2013 and Kiddies has been unable to recover any portion of the loan.

7. The accounting provision for doubtful debts as at 31 December 2013 was $5 000, an increase of $600

from the balance as at 31 December 2012. These debts would have been allowed as a deduction under

any other provisions of Sect 15 of the Income Tax Act, had it become irrecoverable.




8. On 1 June 2013 a motor car used by Zuva’s sales staff for visits to customers, was purchased and

immediately brought into use. (This motor car meets the definition of a passenger motor vehicle as

provided in the Income Tax Act.) It cost $29 900 ($26 000 plus VAT of $3 900). Depreciation of $3 705

has been provided for on this motor car.

9. On 1 December 2011 Zuva leased a computer from a financial institution under a two-year finance

lease. Zuva capitalised the financial lease for accounting purposes. It is an installment credit

agreement for VAT purposes. The computer cost the financial institution $1 967 ($1 710 plus VAT of

$257). Total finance charges in terms of the lease amounted to $451 and the monthly rental to $100.

The final lease rental of $100 was paid on 30 November 2013. On 1 December 2013 the financial

institution simply abandoned this computer to Zuva without requiring any further consideration by

Zuva. Ownership was therefore attained on 1 December 2013. On this date its fair market value was

$1 150 ($1 000 plus VAT of 150). Despite being two years old, the computer was still in good working

order and Zuva indeed used it during the entire 2013 year of assessment. Depreciation of $570 has

been provided for on the computer.

10. The finance charges of $220 accounted for in the 2013 statement of comprehensive income concern

the finance lease for the computer in note 9.

11. On 1 March 2012 Kiddies purchased a new machine (Machine A) on a cash basis in an arm‘s length

transaction for $10 000. Machine A was immediately brought into use in its process of manufacture.

On 31 August 2013 it traded in this machine for a more advanced manufacturing machine (Machine

B). Machine B was purchased as a new machine on a cash basis in an arm‘s length transaction for $15

000. A trade-in price of $13 000 was obtained for machine A. On that date machine A had a book value

of $6 250. Machine B was immediately brought into use in its process of manufacture. Zuva will elect

any option that is available to it to defer any of its tax liability.

12. All other machinery and depreciable assets had a $nil tax value on 1 January 2013.

13. The rentals are paid monthly for the use of a warehouse leased by Zuva for trade purposes.

14. Insurance premiums of $8 100 were incurred during the 2013 year of assessment. In addition, Zuva

paid insurance premiums of $8 875 covering the period 1 January 2014 to 31 December 2014 on 15

December 2013, on the advice of its insurance broker who claimed that this early payment would

secure cheaper insurance. No portion of the advance insurance premium amount was expensed to its

statement of comprehensive income for the 2013 financial year.


15. Salaries, wages and benefits of $290 000 include directors ‘salaries and fees. On 1 June 2013 Zuva

employed a learner (a learner‖ who is not disabled) on a full-time basis at a wage of $75 per week.



(This learner was not previously employed by Zuva.) Zuva entered into a 27 week, registered learner

ship agreement with the learner in the course of its trade. The agreement commenced on 1 June 2013

and was completed on 6 December 2013. The learner ship agreement is registered with the Zimbabwe

Manpower Development Fund (ZIMDEF). The wages paid to the learner and the levies paid to ZIMDEF

are included in the salaries, wages and benefits.

16. The restraint of trade payment of $33 600 was paid to a designer who had been employed by Zuva.

She left its employ on 30 September 2013. The restraint of trade agreement is effective for two

years commencing on 1 October 2013.

17. The leave pay provision was increased by $950 for the 2013 financial year. As at 31 December 2013

the balance on the leave pay provision amounted to $5 450. Actual leave payments made during the

year have been expensed directly to salaries, wages and benefits.

18. Interest incurred during the 2013 financial year on the company‘s business bank account amounted

to $11 700.

19. On 1 December 2013 Zuva purchased outright the Beyblade‖ trade mark from another card

manufacturer for $4 000. The acquisition gives Zuva the exclusive right to market cards under the

Beyblade trade mark in Zimbabwe.

20. In November 2012 Zuva bought stock for $2 415 ($2 100 plus VAT of $315) from a local supplier.

Zuva claimed an input tax credit of $315 for its tax period 1 October 2012 to 30 November 2012.

However, because of quality problems, Zuva paid the supplier only $1 932 ($1 680 plus VAT of $252)

on 30 November 2012, refusing to settle the account until the quality problems had been resolved.

On 31 December 2013 an amount of $483 ($420 plus VAT of $63) was still outstanding despite

numerous letters of demand from the supplier. The amount was reflected under creditors in the

statement of financial position of Zuva as at 31 December 2013. No VAT adjustment that may be

required has been reflected in the detailed draft statement of comprehensive income of Zuva for

the 2013 financial year. None of this stock was on hand as at 31 December 2013.

Other information

Zuva has neither an assessed loss nor an assessed capital loss to carry forward from its 2012 year of

assessment.

Required

Calculate the normal tax liability of Zuva Cards (Pvt) Ltd for its 2013 year of assessment. Show all

workings and address all items. Your answer should start with the comprehensive income (net profit)

before tax of $15 000.



CAA CTA JUNE 2014

Question 3 Solution

Details $ $ Marks

Net Profit for the year 15 000

Sales – Gross Income -

Purchases – imported raw materials – obligation to pay arose

on the 22nd of December hence deductible in 2013 year of

assessment

(24 000)

1

Closing stock – Include raw materials in transit- sect 8(1) (h) 24 000 1

Dividend Income: From resident companies – Exempt 3rd

schedule

(2 020)

1

Dividend Income : Interest not from financial institution hence

taxable

-

1

Sale of shares – Capital in nature (8 000) 1

Insurance settlement: Deemed received 2 736 1

Trading stock stolen (2 000) 1

Prescribed debt taxable since the original purchase would have

been allowed as a deduction

-

Profit on sale of Machine A : accounting entry (6 750) 1

Recoupment on disposal of machine A : ($10,000 * 25% * 2

years) – no capital allowances claimed in the year of sale

5 000

2

Bad debts : Trade debtors - deductible

Bad debts : loan to supplier ( capital in nature since Zuva is not

in the business of giving out loans)

2 700

1

Provision for bad debts : not allowable since not actually

incurred

600

1

Depreciation on motor vehicle 3 705 ½



SIA ($10 000 * 25%) (2 500) 1

Depreciation on computer 570 ½

SIA on computer: ($1 000 * 25%) (250) 1

Finance Charges 220 1

Lease instalments paid : ($100 * 11) (1 100) 1

Depreciation Machine A 1 250 ½

Depreciation Machine B 1 875 ½

SIA Machine B ($15 000 * 25%) (3 750) 1

Depreciation on other machinery and depreciable assets 8 625 ½

Rentals - deductible -

Insurance premium : 2013 tax year -

Insurance premium : 2014 deductible when payment is made (8 875) 1

Salaries and wages -

Restraint of trade : Capital in nature 33 600 1

Provision for leave pay – no expense actually incurred 950 1

Interest ; -

Trade mark : Capital in nature: Please note that no capital

allowances are available on intangible assets as the 4th schedule

only allows allowances on tangible assets used for the purpose

of trade

4 000

2

Admin and marketing expenses -

Taxable Income 45 586

25

Presentation

Total



Question 4

Plastic Ltd (a Zimbabwean resident company) is a registered operator for Value Added Tax (VAT) purposes

and all amounts in the question exclude VAT, except where indicated otherwise.

Plastic Ltd (Plastic) manufactures plastic household products. This process is classified as a “process of

manufacture” for purposes of the Income Tax Act. Plastic has a 31 December year-end.

The financial accountant of Plastic, Andrew, calculated the profit before tax of Plastic as $4 282 040 for

the year of assessment ended 31 December 2013.

As Andrew was uncertain as to the correct tax treatment of the following items, these items have not yet

been included in the calculation of the above profit before tax of Plastic.

Plastic would like to minimise its normal tax liability whenever possible.

1. Importation of manufacturing machine

On 1 November 2012, Plastic purchased a new manufacturing machine for €200 000 from an

independent supplier in Germany and on this date paid a deposit of €150 000. The remaining €50 000

was paid when the machine was shipped to Zimbabwe (FOB) on 1 March 2013(transaction date). On

1 July 2013 the machine was cleared by Customs for home consumption after Plastic paid the duty

(levied in terms of the Customs and Excise Act) of 20% on the customs duty value ($228 000) as

well as the VAT in respect of the importation. On 1 July 2013 the machine was brought into use in the

current manufacturing process.

The exchange rates were as follows:

1 November 2012 €1 = $1.37

31 December 2012 €1 = $1.40

1 March 2013 €1 = $1.38

1 July 2013 €1 = $1.42

31 July 2013 €1 = $1.34

Average exchange rate for Plastic‘s 2012 year of assessment was €1 = $1.36.

Average exchange rate for Plastic‘s 2013 year of assessment was €1 = $1.39.

2. Second-hand plant

On 1 January 2013 Plastic purchased plant from Tupper Ltd for $25 000. Plastic brought the plant into

use in its process of manufacture on the same day. This plant was independently valued at a market

value of $27 000 on 1 January 2013. Tupper Ltd holds 60% of the shares in Plastic.



Tupper Ltd purchased this manufacturing plant new on 1 January 2011 for a cash cost of $20 000. It

was brought into use immediately. Tupper Ltd.’s year of assessment ends on the last day of December.

3. Residential property

3.1 Plastic rents a house for $500 per month from an independent letting agent. This house was made

available to the managing director as a fringe benefit for the full 12 months of the 2013 year of

assessment. The Managing Director has got free use of the house.

3.2 On 1 November 2011 Plastic bought five (5) flats in a newly erected building from the developer

at a total cost of $24 500 each. Four (4) of these flats were rented out to employees for $200 each

per month, effective from 1 December 2011. The other flat was immediately sold to Andrew (the

financial accountant) for $23 000, financed by an interest-free loan. Andrew repaid $6 000 of the

loan in the 2013 year of assessment. Plastic does not own any other residential units within

Zimbabwe.

4. Factory buildings and improvements to leasehold property

On 1 December 2010 Plastic purchased a plot of land for $50 000. Erection of a factory on this land

commenced on 1 January 2011. It was completed on 31 August 2011 at a cost of $200 000. The factory

was brought into use in a process of manufacture on 1 September 2011.

As a result of continued unrest in the vicinity of this factory, the board of directors of Plastic decided

on 1 July 2013 to dispose of the land and buildings as soon as possible. The land and buildings were

sold to a non-connected party on 30 September 2013 for $220 000, of which $30 000 was for the land

and $190 000 for the buildings. Plastic continued to use the land and buildings in its process of

manufacture for the period 1 July 2013 to 30 September 2013.

In anticipation of the proposed sale Plastic, on 1 September 2013, entered into a 30-year operating

lease agreement with Blue Mountain Ltd for the lease of an industrial site. This lease agreement

stipulated that Plastic would:

pay a premium of $7 500 on 1 September 2013;

erect a factory on the site at a cost of $320 000;

and from 1 September 2013, pay a monthly rental of $1 400 in advance (subject to an

escalation of 5% for each 18-month period).

Erection of the factory commenced on 1 October 2013. It was completed on 30 November 2013. The

factory was brought into use on 1 December 2013. The cost of the factory was $350 000.

5. Lump sum paid to retired employee

Plastic covers as part of the company‘s retirement benefit plan for employees, post-retirement

medical aid contributions. This is done by paying a lump sum directly to the retired employee out of

which the employee then funds his post-retirement medical aid contributions. On 31 January 2013

Plastic paid a lump sum (to fund post-retirement medical aid contributions) of $18 000 to Joshua



Randals who retired at the age of 65. Plastic retains no further obligation relating to the mortality risk

of Joshua Randals.

Required

I. Prepare the journal entries to account for the information contained in Note 1 (Importation of

manufacturing machine). Your journals should comply with the requirements of the applicable

IFRS. Structure your solution as follows:

a) 1 November 2012 – 1.5 marks

b) 1 March 2013 – 3 marks

c) 1 July 2013 – 5.5marks

II. Discuss with supporting calculations where relevant, the income tax implications of the

information contained in Notes 1 – 10. Your discussion should cover implications from Plastics Ltd

perspectives as well as from an employee’s perspective where applicable. The marks will be

allocated as follows;

a) Note 1 – 3 marks

b) Note 2 – 3 marks

c) Note 3 – 8 marks

d) Note 4 – 13 marks

e) Note 5 – 3 marks

CAA CTA JUNE 2014



Question 4 Solution

PART A – 10 MARKS

1 November 2012

$ $ marks

Prepayment (150 000*1.37) DR 205 500 1

Bank CR 205 500 1/2

Being recording of the payment made on 1 November 2012

1 March 2013

Machinery in Transit (50 000 * 1.40) DR 70 000 1

Bank CR 70 000 1/2

Being recording of the second payment

Machinery in Transit DR 205 500 1

Prepayment CR 205 500 ½

Alternative

Machinery In transit DR 275 500 2

Bank CR 70 000 1/2

Prepayment CR 205 500 ½

Since the machine was shipped FOB on 1 March risk and rewards were transferred as at that date.

1 July 2013

Manufacturing Machine: PPE ($228 000 * 20%) DR 45 600 1

VAT Input: (($228 000 + $45 000)* 15%) DR 40 950 2

Bank CR 86 550 1/2

Being recording of duty and VAT paid on importation

Manufacturing Machine: PPE DR 275 000 1

Cr Machinery in Transit CR 275 000 1



Part B – 30 marks

Note 1 – 3 marks

The cost of acquiring the manufacturing plant is allowed as a deduction in terms of sect 15 (2)

(c) – 1mark

On 1 July 2013 when the machine is brought into use Plastic ltd can claim SIA on the total cost of

acquiring the machine- 1mark

The SIA will be calculated as follows : : ((150 000 * 1.37 + 50 000 * 1.4 + 45 600) * 25%) = $80

150- 2 mark

Note 2 – 3 marks

The second hand plant acquired is going to be used for the purposes of trade hence Plastics can

claim capital allowances – 1 mark

The capital allowance will be claimed on the actual amount paid of $25 000 since that’s what

Plastics incurred in acquiring the asset. – 1 mark

Since Plastic would want to minimise its tax liability they can elect to claim SIA as follows:

SIA ($25 000 * 25%) = $ 6 250 – 1 mark

Note 3 – 8 marks

House occupied by the MD

The cost of renting the housing i.e. $500 per month is a staff costs therefore will be allowed as a

deduction to Plastics Ltd. – 1 mark

However the MD will be taxed on the housing benefit arising thereof and in this case the benefit

will be calculated as $500 per month. – 2 marks

Flats acquired

Occupied by employees

The flats occupied by employees qualify to staff housing as the cost per unit is below the

qualifying cost of $25 000 – 1 mark

Hence Plastics can claim W&T on the cost of acquiring the units at a rate of 5% per annum -1

mark

SIA is not claimable since the flats were acquired and not constructed. – 1 mark

W& T = $24 500 * 5% * 4 = $4 900 – 1 mark

In determining the PAYE for the employees Plastics has to consider if a housing benefit is

accruing to the employees by comparing the $200 they are paying to the market related rentals.

– 1 mark



Bought By Andrew

The sale of the other flat does not have income tax implication since the proceeds are capital in

nature. 1 mark

However in the hands of Andrew a benefit accrues since he got an interest free loan to finance

the acquisition. 1 mark

Note 4 – 13 marks

Factory Building

The factory building qualifies as an industrial building since it is used in a process of

manufacturing. 1 mark

Therefore Plastics would have been able to claim SIA in 2011 since they constructed the

building. 1 mark

On disposal of the building a recoupment will arise, calculated as follows:

($190 000 – ($200 000 * 25%)) = $140 000. 2marks

There are no capital allowances claimable on the land portion of the property. 2 marks

Leasehold Property

The premium will be deductible over the lesser of 10 years or the lease period commencing the

date the leased property is used for the purpose of trade. 1 mark

In this case the lease premium paid of $7 500 will be deductible over 10 years commencing 1

December 2013. 1 mark

The monthly rental of $1 400 will be deductible when the property is now being used for the

purpose of trade. 1 mark

Therefore in the 2013 year of assessment the rental for the period September to November will

not be allowed as a deduction. 1 mark

The improvements were made in terms of the lease agreements hence Plastics has two option

available to claim deductions over the expenditure incurred

o Sect 15(2) (e) – the obligatory improvement of $320 000 will be deductible over 10

years. 2 marks

o The Plastics can use Sect 15 (2) (c) to claim capital allowances on the voluntary

improvements of ($350 000 - $320 000) I,e claim SIA. 2 marks

o Sect 15 (2)(e) – Plastics Ltd can elect to claim SIA on the improvements made

commencing 1 December 2013.1 mark

Note 5 – 3 marks

The lump sum paid to Joshua is contractual hence it forms part of the staff costs therefore

deductible in terms of Sect 15. 2 marks

In the hands of Joshua the sum received is to pay for medical aid contributions, therefore the receipt will

be exempt from tax in terms of the 3rd schedule. 1 mark



Question 5

Your client, Taisek (Pvt) Ltd, is an engineering company registered in Zimbabwe. They have recently been

investigated by the Zimbabwe Revenue Authority in respect of normal income tax for the year ended 31

December 2013. The financial director of the company has requested that you assist in dealing with

queries raised by the investigators from the Zimbabwe Revenue Authority.

The Zimbabwe Revenue Authority investigators have compiled a schedule of queries, which are listed

below:

1. A new machine was purchased by Taisek (Pvt) Ltd from Germany in November 2013 for $15 000. This

was delivered to the factory in Zimbabwe on 20 December, and installed and tested on 21 December

2013. As a result of factory closure over the Christmas season, the company only started to use the

machine in the production process on 6 January 2014. The company claimed a capital allowance of $3

750 for the 2013 tax year.

2. The company's senior engineer incurred travel expenses of $3 500 in August 2013.He went to

Germany to inspect and test a machine and to make the necessary arrangements for its delivery to

Zimbabwe. The travel costs of $3 500 were charged to 'foreign travel' in the profit and loss account

and claimed in full for tax purposes in the 2013 tax year.

3. The company demanded upfront payments from its major customers because of tight cash-flow

restrictions. The company held payments received in advance totalling $17 500 at 31 December 2013.

They were disclosed as deferred revenue in the 2013 financial statements. No adjustments were made

regarding these receipts in the 2013 tax year.

4. The company's cut-off date for the 2013 accounting year was 21 December. Stocks were counted and

all books of account were written up to the close of business on that date. Sales totalling $71 250

were made during the period 27 to 29 December. These were processed in January 2014, but not

accounted for i in the financial statements for the 2013 financial year.

5. A payment of $23 000 was made to the Zimbabwe Electricity Supply Commission in July 2013 for

electricity usage. This was erroneously posted to the 'repairs and maintenance' account and reflected

as such in the year-end financial statements.

6. University fees totalling $700 were paid to the University of Zimbabwe on behalf of the managing

director's son (who is 20 years of age). (The managing director is also a shareholder in the company

and holds 51% of the issued share capital.) This payment was erroneously allocated to the 'repairs

and maintenance' account and reflected as such in the year-end financial statements.



The son is studying for a degree in mechanical engineering, which is consistent with the main

business activity of Taisek (Pvt) Ltd. In addition, he has signed a contract to the effect that he would

work for the company for a period of three years after completion of his studies.

7. An office desk, which had been purchased in March 2013 for $2 000, was erroneously allocated to

the 'purchases' expenses account and reflected as such in the year-end financial statements.

8. The company carried out alterations totalling $10 000 to the administration block which the

company owns. This involved changing the position of doors and windows as well as the installation

of 20 new power points. The whole amount was claimed as repairs and maintenance.

9. Taisek (Pvt) Ltd borrowed an amount of $300 000 on 2 January 2013 at an interest rate of 15% per

annum. It used these funds to purchase shares in a building contracting company, Build (Pvt) Ltd.

The shares cost $50 000 and the company advanced an interest free-loan to Build (Pvt) Ltd of $150

000. The balance of $100 000 was used to purchase raw materials. Taisek (Pvt) Ltd claimed the full

interest on the original loan amounting to $45 000 in its tax computation for the year 2013.

10. On 1 February 2013 Taisek (Pvt) Ltd entered into a lease agreement with Mutumwa Properties (Pvt)

Ltd for the leasing of an industrial building. The details of the lease agreement were as follows:

Lease Period: 12 years

Lease Premium (paid on 1 February) $10,000

Lease rental (Monthly) $4,000

In terms of the lease agreement Taisek is obligated to make improvements with a total cost of a

maximum value of $30,000.

Between February and April 2013 Taisek made capital improvements to the building at a cost of

$40,000 and then commenced to use the building in the manufacturing process with effect from 1

May 2013. In the 2013 Financial statements Taisek (Pvt) Ltd Expensed the lease rentals and lease

premiums to the Statement of profit and loss.

The lease was classified as a finance lease for financial reporting purposes hence the cost of the

improvements were capitalised to the leased building.

In preparing the tax return for the 2013 tax year no adjustments were made in respect of the above

information.

Required

Question 2

(a) Advise Taisek (Pvt) Ltd with regards to the Income Tax Implications of the transactions detailed

in Note 1 to Note 9. Where adjustments are required provide the supporting calculations of

amounts taxable or deductible where applicable. 20 marks



(b) With reference to Note 10:

(i) Advise Taisek (Pvt) Ltd of the Income tax implications of the Lease agreement and

determine the deductions that would result in Taisek paying the minimum tax possible

from the lease transaction. 6 marks

(ii) Discuss in respect of Mutumwa Properties (Pvt) Ltd the income tax implications of the

lease agreement entered into with Taisek (Pvt) Ltd. Provide supporting calculations

were applicable. Assume that Mutumwa Properties had originally acquired the building

for $130,000 in 2009. 4 marks

CAA CTA 2014

Question 5 Solution

Advice Taisek (Pvt) Ltd with regards the Income Tax Implications of the transactions detailed in Note 1 to

Note 9. Where adjustments are required provide the supporting calculations of amounts taxable or

deductible where applicable. 30 marks

Note 1- New Machine from Germany

In terms of section 15 (2) (c) and the 4th schedule capital allowances are claimed on assets that are

used for the purpose of trade commencing the day the asset is first brought into use. 1

Therefore, Taisek is incorrect to claim the capital allowance in 2013 as the machinery was only brought

into use on the 2nd of January 2014. 1

Need to add back the $3,750 in the determination of taxable income for the 2013 tax year. 1/2

Note 2 - Travel Expenses – sect 15 (2) (a)

The expenditure can be deemed to capital expenditure as it was incurred in the acquisition of

machinery. 1

Therefore, Taisek should have capitalised the costs to the machinery and claimed it as part of the

capital allowances from the date the machinery is 1st brought into use. 1

Need to add back the $3,500 in calculating the taxable income for the 2013 tax year.1/2

Note 3 - Advance Payment – Sect 8 (1)

In terms of section 8 gross income includes amounts received, therefore the advance payments from

customers should be included in gross income upon receipt. 1

The $17 500 should be included in gross income in the 2013 tax year. 1/2

Note 4 – Sales Cut-off – Sect 8(1)



The tax year ends on 31 December 2013, therefore the accounting records need to be adjusted for

transactions that took place between the 21st and the 31st. 1

Revenue of $71 250 should be included in gross income for the 2013 tax year. 1/2

Note 5 - Payment to ZESA – Sects 15 (2) (a)

No adjustment required since both repairs and maintenance and electricity expenses are tax

deductible – Sect 15 1

Note 6 – University fees

In terms of sect 15 (2) (p) A deduction is allowed of grants, bursaries, scholarship paid for a person

undergoing technical education, provided that: the course is related to the taxpayer’s trade and that

the beneficiary should not be a near relative of the individual controlling the company, his spouse or

near relative of the spouse unless the director works full time for the company and controls not more

than 5% of the share votes. 1

In this case the MD’S son is studying towards an engineering degree which is connected to Taisek’s

trade, however the MD holds more the 5% of the share capital, therefore the fees is not deductible.

1

Need to add back the $700 in the calculation of taxable income for the 2013 tax year. 1/2

Note 7 – Office desk

The purchase of the office desk is capital expenditure is not deductible as per sect 15 (2) (a), therefore

Taisek should add back the cost. 1

However, since the desk is being used for the purpose of trade Taisek can claim capital allowances on

the cost thereof. 1

SIA of $500 ($2,000 * 25%) 1/2

Note 8 - Alterations to admin Block

The question is whether the expenditures qualify as repairs and maintenance or are capital in nature.

The repositioning of the doors and windows does not add value to the building hence these qualify as

repairs and maintenance – Sect 15 (2) (b). 1

The installation of new power points is also repairs since this does not constitute a significant

component of the building 1

Therefore no adjustment is required 1/2

Note 9 – Loan

In terms of section 15, expenditure is deductible to the extend it was incurred for the purpose of trade

and is not capital in nature. 1

The interest was incurred on the loan utilised as follows

Purchase of share – capital in nature hence interest relating to the $50,000 not deductible 1



Loan to Build (Pvt) Ltd – Taisek is not in the business of giving out loans hence the interest related to

the $150,000 not deductible. 1

Loan to purchase raw materials – raw materials are used for the purpose of trade hence the interest

element on the $100,000 is tax deductible. 1

With reference to Note 10:

Advice Taisek (Pvt) Ltd of the Income tax implications of the Lease agreement and determine the

deductions that would result in Taisek paying the minimum tax possible from the lease transaction.

Lease Premium

In terms of section 15 (2) (d) the lease premium paid by Taisek is deductible over the lesser of

the lease period or 10 years beginning from when the leased asset is first put to use.

1

Therefore the amount deductible in the 2013 tax year is $667 ($10,000/120 * 8months).

1/2

Lease Rental

The lease rental payments are allowed as a deduction beginning when the leased asset is used

for the purposes of trade. 1

In this case the property was used in the production process commencing 1 May hence lease

rentals from May to December 2013 allowable in full. 1

The rentals paid between February and April can be claimed as preproduction expenditure in

accordance with section 15 (2) (t). 1/2

Lease improvements

Taisek has two options available in claiming a deduction in respect of the lease improvements.

Since the improvements are in terms of the lease agreement, Taisek can claim a deduction

over the lesser of the lease term or 10 years. 1

The second option is to claim SIA since the improvements were constructed and relate to an

industrial building. 1

To minimise the tax liability Taisek should claim SIA in the 2013 tax year as follows:

$40,000 * 25% = $10,000 1/2

Discuss in respect of Mutumwa Properties (Pvt) Ltd the income tax implications of the lease agreement

entered into with Taisek (Pvt) Ltd. Provide supporting calculations were applicable. Assume that

Mutumwa Properties had originally acquired the building for $130,000 in 2009.

Lease Premium



In terms of section 8 (1) (d) the lease premium is taxable in full in the year of receipts,

therefore Mutumwa will be taxed on the $10,000 in the 2013 tax year.

1

Lease Rental

The lease rentals are gross income in the hands of Mutumwa hence taxable commencing 1

February 2013. 1

Lease improvements

In terms of section 8 (1) (e) obligatory improvements made in terms of a lease agreement are

gross income in the hands of the lessor. 1

The lease improvements are taxable over the lower of 10 years or the lease term.

1

Therefore, in the 2013 tax year Mutumwa is supposed to include $2 000

($30,000/120*8months). ½

Mutumwa is only taxed on the $30 000 which was the maximum value of the obligatory

improvements in terms of the lease agreement. 1

Capital Allowances

Since Mutumwa is earning rental income from the building they can claim capital allowances

on the cost of acquiring the building. 1

Therefore, Mutumwa will be able to claim W&T at a rate of 2.5% per annum since the property

qualifies as a commercial building as defined. 1



Question 6 30 marks

In 2008 a group of young doctors who had just finished their housemanship decided to open a

hospital in the Northern suburb of Milton Park in Harare. On formation of the company CPT

Private Limited (CPT (Pvt) Ltd) there were three shareholders namely, Cleopatra, Paida and

Tawanda who were all qualified doctors. CPT (Pvt) Ltd experienced substantial growth between

the years 2009 and 2011 which was after the introduction of the multicurrency system by the

Zimbabwean government and due to this continued growth the company’s operations were

expanded to all the other major towns of Zimbabwe namely, Gweru, Bulawayo and Mutare.

Due to the substantial growth that CPT (Pvt) Ltd has been experiencing over the years they

decided to seek tax advice in respect of their tax affairs for the 2014 financial year. Since the bulk

of the CPT’S management team was made up of doctor who had no prior knowledge of tax

requirements, they decided to hire you as their consultant to assist them in regularizing their tax

position. They have requested you to assist them with the following for the 2014 tax year:

Preparation and submission of the ITF12B on the quarterly payments dates (QPDs).

Preparation of the annual income tax return for the 2014 tax year

Provided tax planning advice to CPT (Pvt) Ltd in respect of transactions that they are

planning on entering into in the 2015 financial year.

CPT (Pvt) Ltd makes use of an annual budgeting process and you were given the following

information respect of the budgets for the 2014 financial year which ends on 31 December:

Budgeted Net Profit before Tax for the year: $230,000

Estimated taxable income for the year: $187,000

Over the course of 2014 these budgeted figures were a close approximation of CPT’s actual

performance hence the company did not see the need to update their budgets.

CPT’s accountant provided you with the following information in respect of the 2014 financial

year. The net profit before tax figure amounted to $273,430. This figure was calculated after

taking the following information into account amongst other entries.

1. CPT (Pvt) Ltd has the following revenue lines namely bed fees (i.e. in respect of patients

admitted to the hospital overnight), theatre fees, labour ward fees, maternity ward fees,

blood transfusion fees and pharmacy sales. The company’s accounting policy is to recognize

revenue from all of the above when the service and goods have been delivered to the patient.

The following journals was processed in respect of bed fees:



$(DR) $(CR)

Bank 450,000

Prepayment – Bed fees (SFP) 54,000

Income Statement - Bed fees (I/S) 346,000

The journal is in respect of cash receipts received from customers in the month of December

2014.

2. Patients who have been booked for the theatre are required to pay a non-refundable deposit

equivalent to 40% of the expected cost of the surgery. The deposit payable is credited against

the patients account when the patient is finally invoiced. As at 31 December there were

deposits amounting to $34,000 which were recognized in the statement of financial position.

3. Also included in the current year’s revenue is an amount of $15,000 invoiced to a hospital in

Zambia where two of CPT’s doctors visited the hospital as part of a team of doctors who were

involved as part of an outreach programme financed by the Zambian government. The

accountant was not sure on whether this amount should be included as part of CPT’s taxable

income as he had attended a tax seminar where the presenter pointed out that income which

is not from a source in Zimbabwe is not taxable in Zimbabwe.

4. Details of other income were as follows:

$

Bad debts recovered (in respect of a piece of land sold in 2012) 12,000

Interest received on deposits with CBZ Bank 3,000

Dividends received - Paid by a company registered in Zambia (Gross) 4,000

Rental Income – Leasing of a warehouse in the Southerton area of Harare 7,000

26,000

5. Included in CPT’s income is an amount of $23,000 in respect of share of profit from a hospital

in Highfield which it operates as a joint venture with Parirenyatwa Group of Hospitals. The

joint venture is being operated through a company named PC (Pvt) Ltd in which the

shareholding is 50:50 between CPT and Parirenyatwa.

6. CPT mainly operates from leased buildings in the conducting of its hospital business. During

the 2014 tax year CPT entered into the following lease agreement:



a. On 1 April 2014 CPT entered into a lease agreement with the Mining Industry pension

fund (MIPF) for the leasing of a building on the outskirts of the Harare CBD. The

pertinent terms of the agreement were as follows:

Commencement date: 1 April 2014

Non-refundable deposit : $20,000

Monthly lease rental of $3,000

Lease period : 8 years

CPT to make improvements to the building not exceeding a total cost of

$25,000

From 1 April to 30 June 2014 CPT renovated the leased building and incurred a total cost

of $28,000 broken down as follows: Improvements $24,000 and Repairs $4,000. CPT’s

accountant was not sure of the lease accounting requirements and he therefore expensed

the following amounts in respect of the above lease agreement.

$

Deposit 20,000

Lease rentals 27,000

Lease improvements and repairs 28,000

75,000

CPT started using the building for the purposes of trade commencing 1 July 2014.

7. CPT made the following donations during the 2014 tax year which were expensed in the

determination of the profit before tax:

$

Wedza rural district clinic for the acquisition of drugs 4,000

Marinatha Junior school for the acquisition of books* 3,000

7,000

*Paida one of the shareholders holds a 20% ownership stake in the school.

8. As at 31 December 2014 CPT’s asset register had the following assets:

Description Date Acquired Cost ($) Depreciation

charge for

the year -

I/S($)

Carrying

amount as at

31 December

2014 ($)

5 Ambulances 2009 100,000 12,500 25,000

CT Scanner 2012 102,000 12,750 63,750

Computer

equipment

2014 30,000 6,000 24,000

Other hospital

equipment

2010 150,000 15,000 75,000



During the 2014 tax year a Toyota corolla sedan which had been acquired in 2011 for a cost

price of $16,000 was disposed of by CPT for an amount of $8,000. CPT recognised as amount

of $1,600 in other income as a profit on disposal of the Toyota corolla.

Assume that CPT has always claimed the maximum possible capital allowances where

applicable.

2015 Proposed Transaction:

i. CPT founding shareholders in line with their vision of providing health care services are

considering opening a hospital in the border town of Beitbridge. Tawanda tabled a

proposal to the shareholders whereby CPT would acquire Pachedu (Pvt) Ltd which

operates a hospital in Beitbridge. On further investigation in respect of the above

proposal, it was noted that Pachedu (Pvt) Ltd had tax assessed losses of $90,000 as at 31

December 2015. Cleopatra attended a tax seminar in July 2014 where the presenter

highlighted that assessed losses are an allowable deduction and she was highly behind

the proposal to acquire Pachedu (Pvt) Ltd as CPT would benefit from these assessed

losses.

Required

a) Calculate the provisional tax which should have been paid by CPT (Private) Limited for the

year ended 31 December 2014, clearly indicating the due dates and the respective tax

amounts. 4 marks

b) Calculate the taxable income and corporate tax payable by CPT (Private) Limited for the year

ended 31 December 2014. 20 marks

Note 1: Your answer should start with the net profit figure of $273,430 and list all of the

items referred to in notes (1) to (7), indicating by the use of zero (0) any items which do

not require adjustment.

Note 2: Your calculations should assume that the provisional tax paid was as calculated in

part (a) of the question.

c) In respect of the 2015 proposed transaction write an email to the accountant advising him of

the Income tax implication s of the proposed transactions: 4 marks

i. Note I: Your email should address the circumstances under which the assessed losses

from Pachedu (Pvt) Ltd will allowed as a deduction or disallowed as a deduction to

Pachedu. Bonus marks awarded for the identification of applicable case law.

Clarity of Presentation 2 marks

Total 50 marks



Question 6 Solution

Question 2

Calculate the provisional tax which should have been paid by CPT (Private) Limited for the year ended 31

December 2014, clearly indicating the due dates and the respective tax amounts.

Date Estimated

Taxable

Income

Total Annual

estimated

@ 25.75%

% Due Amount due

and payable

Marks

25 March 187,000 48,152.5 10% 4,815.25 1

25 June 187,000 48,152.5 25% 12,038.13 1

25 September 187,000 48,152.5 30% 14,445.75 1

20 December 187,000 48,152.5 35% 16,853.38 1

Total 48,152.5

4 marks

Calculate the taxable income and corporate tax payable by CPT (Private) Limited for the year ended 31

December 2014.

Note 1: Your answer should start with the net profit figure of $315 000 and list all of the items

referred to in notes (1) to (7), indicating by the use of zero (0) any items which do not require

adjustment.

Note 2: Your calculations should assume that the provisional tax paid was as calculated in part (a) of

the question.

Income Tax Computation for the year ended 31 December 2014: CPT Pvt Ltd

$ $

Net Profit before tax 273,430 ½

Prepayments – Included in gross income at the earlier of

receipt or accrual – sect 8

54,000 1

Deposits from patients - – Included in gross income at the

earlier of receipt or accrual – sect 8

34,000 1



Receipts from Zambia – from a source within Zimbabwe

since CPT does not have independent operations in

Zambia

0 1

Bad debts recovered : The original amount recovered was

never deducted against gross income since it is capital in

nature

(12,000) 1

Interest : CBZ - Exempt (3,000) ½

Dividend received : Foreign taxed at a different tax rate (4,000) ½

Rental Income 0 ½

Share of Profit : ($23,000) 1

Deposit – Sec 15 (2) (d) - 20,000

- ($20,000 * 9/96) (1,875) 18,125 2

Lease rentals 0 ½

Lease improvements :

Repairs 0 ½

Improvements 24,000

Allowable deduction – sec 15 2 (e) – ($24,000* 6/93) (1,548) 22,452 2

Donations: Wedza rural district clinic – sec 15 (2) (r1) 0 ½

Marinatha Junior school 3,000 1

Depreciation 5 ambulances 12,500 ½

Capital allowances – 5 ambulances - exhausted 0 ½

Depreciation CT Scanner 12,750 ½

Accelerated Wear & Tear ($102,000 * 25%) (25,500) 1

Depreciation Computer equipment 6,000 ½

SIA ($30,000 * 25%) (7,500) 1

Depreciation other hospital equipment 15,000 ½



Capital allowances – other hospital equipment -

exhausted

0 1

Profit on disposal - Toyota corolla (1,600) ½

Recoupment – (($8,000 * $10,000/$16,000) - $2,500) 2,500 2

Taxable Income 377,157

Tax @ 25.75% 97,117.93 ½

Foreign dividends 4,000 ½

Tax @ 20% 800 ½

Total Tax ($97,033.25 + $800) 97,917.93

Less amounts paid on the QPDs (48,152.5) ½

Total tax payable 49,765.43

24

In respect of the 2015 proposed transaction write an email to the accountant advise him of the Income

tax implication of the proposed transaction:

Note I: Your email should address the circumstances under which the assessed losses from Pachedu (Pvt)

Ltd will allowed as a deduction or disallowed as a deduction to Pachedu. Bonus marks awarded for the

identification of applicable case law.

In terms of section 15 (3) of the Income Tax Act if CPT (Pvt) Ltd acquired Pachedu, CPT would be able

to claim a deduction in respect of the assessed losses which had accrued to Pachedu. 1 mark

However CPT will only be able to claim a deduction in respect of assessed losses with an ageing of less

than 6 year. 1 mark



Also if it is proved that the intention of CPT in acquiring Pachedu would be to utilize the assessed

losses, then a deduction in respect of the assessed losses would be denied to CPT. 1 mark

In ITC 1347 (1982) 44 SATC 33, the court ruled that if the predominant reason for the acquisition of

the loss making company are possible business advantage rather than of taking advantage of the tax

losses, the tax losses will be allowed as a deduction to the acquiring company. 1 mark

Therefore, the onus will be on CPT to prove that the predominant reason for acquiring Pachedu would

be the possible business advantages of establishing a hospital in Beitbridge. 1 mark



Question 7 30 Marks

Pamusha (Pvt) Ltd (Pamusha) is a company registered and incorporated in Zimbabwe. It is a small to medium enterprise, manufacturing various household articles and corporate gifts made with decorative beads. Pamusha sells its products through catalogues and mail order, and through a recently purchased retail shop in the dormitory town of Chitungwiza. Pamusha is a registered value added tax (VAT) operator and has a year of assessment ended 31 December. The income statement of Pamusha, for its year of assessment ended 31 December 2014, shows a net profit before tax of $103,215. Unless specifically stated to the contrary, all amounts are exclusive of VAT.

The following information is relevant for the year ending 31 December 2014:

1. Included in net profit before tax are the following dividends that accrued during the year 2014:

$ 30 June 2014 500 30 September 2014 300

These dividends are from shares listed on the Zimbabwe Stock Exchange (ZSE). 2. In the 2010 year of assessment Pamusha had purchased a large stock of wire for $2,500

from a producer which was closing down. Pamusha paid 50% of the purchase price on delivery. For the following three years Pamusha tried unsuccessfully to pay the balance owing by cheque. All cheques were returned endorsed with ‘address no longer valid’. Pamusha wrote the balance owing of $1,250 back to the income statement in the 2014 year of assessment.

3. Bad debts of $1,500 were written off in the income statement. The $1,500 consists of $500 for trade debts gone bad and a $1,000 loan, which had been made to a supplier and will not be repaid as he has been subsequently placed in liquidation. The loan was to assist the supplier with a cash flow problem.

4. On 1 May 2014 Pamusha purchased a new machine for immediate use in its manufacturing process. The machine had cost $9,500. Nothing had been charged to the income statement in respect of this machine, which has an estimated useful life of four years.

5. On 31 October 2014 Pamusha realized it needed a further machine but did not have sufficient cash at the time to purchase it outright. The machine had a cash cost of $24,725 (inclusive of VAT) and Pamusha signed a hire purchase agreement to pay for the purchase price over 24 equal instalments commencing 1 November 2014. The only amount charged in Pamusha’s income statement for this machine was a depreciation allowance of $500.



6. Pamusha purchased trading premises on 1 November 2014, consisting of a retail shop, to sell its products direct to the public. The shop is located in a new complex and had not previously been used. The land and shop were purchased for $94,300 (VAT inclusive).The purchase price was distributed as follows: Land $18,860 and Building $75,440. Pamusha does not write off land and buildings in its income statement. The shop was officially opened on 1 December 2014.

7. Pamusha paid insurance premiums of $3,200, for its 2015 year of assessment, in advance, on 15 December 2014. No part of this was expensed to the income statement as the premiums related to the 2015 year only.

8. Pamusha has always leased the warehouse in which its manufacturing operations are carried out. The lease payments are $805 (VAT exclusive) per month. In terms of the lease agreement, which commenced on 1 January 2012, Pamusha was obliged to effect certain improvements to the building to the value of $14,000. The improvements were completed on 31 August 2014 at a cost of $15,500 and brought into use on 4 September 2014. The lease is for 20 years. Although Pamusha does not normally depreciate land and buildings it has expensed the cost of the improvements to the leased building as they do not belong to it. An amount of $15,500 has been expensed in the 2014 year in respect of the improvement costs and in addition to the lease rentals of $9,660 for the 2014 tax year. The lessor had originally acquired the building in 2009 for a total cost of $110,000.

9. Pamusha has three delivery vehicles consisting of a motorcycle and two small delivery vans.

On 1 August 2014 the motorcycle was involved in a serious collision and Pamusha wrote off the book value of $4,130 at the date of the accident, in addition to a depreciation charge of $670 in its income statement. The motorcycle had been purchased on 1 March 2011 for $8,000. $4,000 was recovered from Pamusha’s insurers. Pamusha immediately purchased a new motorcycle for $10,200 using 80% of the insurance proceeds of $4,000 to pay part of the purchase price. The insurance proceeds have been credited to the income statement. The two delivery vans are fully written off for both accounting and tax purposes.

10. Pamusha made the following donations during the 2014-year assessment:

$ Midlands State University to fund lecturers’ bonuses 24,000 PAAB Accountants Annual Conference 2,300 Parirenyatwa Group of Hospitals for acquisition of drugs 3,400

11. Included in determining the net profit before tax were the following expenditures



$ Entertainment allowance for the MD – used 70% for Pamusha’s 4,200 Business and 30% for the MD’s private business Lunches with clients 1,400

12. Pamusha declared a dividend of half of its net profit after tax on 31 December 2014. The previous dividend declaration had been on 31 December 2013.

Required

a) Calculate the taxable income and income tax liability for Pamusha (Pvt) Limited for the 2014 year of assessment. For items which do not require an adjustment in your computation indicate by the use of a zero and provide a brief explanation. 25 marks

b) With reference to the information in Note 8, discuss the income tax implications in the hands of the lessor for the 2014 year of assessment. 5 marks



Question 7 Solution

Calculate the taxable income and income tax liability for Pamusha (Pvt) Limited for the 2014 year of assessment. For items which do not require an adjustment in your computation indicate by the use of a zero and provide a brief explanation. Pamusha (Pvt) Ltd income tax computation for the year ended 31 December 2014

$ $ Marks

Net Profit before tax 103,215 ½

Dividends from Local companies – exempt ($500 + $300) (800) 1

Wire purchase written back – Gross Income sect 8 0 1

Bad Debts:

For trade debt: previously taxed therefore deductible 0 ½

Loan to supplier: capital in nature 1,000 1

Capital allowance: Machine ($9,500 * 25%) (2,375) 1

Depreciation – not incurred 500 ½

Capital allowance – Hire purchase – 4th schedule par 10-

($24,725*100/115*25%)

(5,375)

3

Trading shop:

Land : no capital allowances on land 0 ½

Building: ($75,440*100/115 * 2.5%) (1,640) 1

Insurance Premiums – Sect 15 (3,200) 1

Lease Improvements expensed – capital in nature 15,500 ½

Lease improvements – capital allowances ($15,500 *

25%)*

(3,875) 3



Lease rentals – Adjust for VAT component expensed

($9,660 * 15/115)

1,260 1

Motor cycle written off 4,130 ½

Depreciation 670 ½

Proceeds (4,000) ½

Recoupment - w1 400 3

New motor cycle - $10,200 * 25% (2,550) 1

Donations:

Midlands state university – not for equipment, buildings

or books hence not deductible

24,000 1

PAAB Accountants Annual Conference – not in connection

with trade

2,300 1

Parirenyatwa – Deductible Sect 15 (2) (r1) 0 1

Entertainment allowance MD – 70% not deductible (the

balance of 30% will be taxed in the hands of the MD,

therefore Pamusha will get a deduction since it qualifies

as a staff cost

2,940 2

Lunches with clients – Prohibited deduction 1,400 1

Dividends declared – capital in nature 0 1

Taxable Income 133,500

Tax @ 25.75% 34,376

Total 28

* Claiming capital allowances will give Pamusha the maximum possible deduction in respect of the lease improvements.



Workings W1 – Recoupment Motor Cycle $ Proceeds 4,000 ITV- $8,000 * 25% (2,000) Potential Recoupment 2,000 Actual Recoupment - $2,000 * 20% (Limited to proceeds not used To acquire replacement motorcycle 400 With Reference to the information in Note 8, discuss the income tax implications in the hands of the lessor.

In terms of section sect 8 (1) (e) obligatory improvements effected by the lessee are taxed in the hands of the lessor from the date the improvements are completed a period which is the lesser of the remaining lease period and 10 years. 2 marks

In this case the lessor will only be taxable on $14,000 since the lease agreement stated that improvements to be made are to the value of $14,000. 1

Therefore the amount taxable in the 2014 tax year is : $14,000/120 *4 = $467 1 Also since the building was acquired the lessor will be able to claim wear and tear on the

cost of acquisition: $110,000 * 5% = $5,500. 2



Question 8 Kuda and Tonde Kupara are brothers and equal partners in their partnership business, K&T architects and structural engineers. The partnership is in its third year of trading and operates from office premises owned by Kuda. Tonde provides all of the office furniture and equipment used by the partnership. In line with the partnership agreement, Kuda and Tonde are entitled to a monthly payment equal to 5% of the cost of their fixed assets which are used by the partnership. Kuda and Tonde use their own personally acquired motor vehicles for partnership business and charge the partnership for the business mileage incurred. The partnership employs three staff in addition to the partners. The partnership’s statement of profit or loss for the year ended 31 December 2013 is as detailed below:

Note US$ Income 730 000 Less expense: Distribution expenses 1 (160 000) Administrative expenses 2 (290 000) Other expenses 3 (30 000)

–––––––– Profit for the year 250 000

––––––––– Notes: 1. Distribution expenses comprise:

US$ Motor vehicle running expenses 70 000 Insurance and licensing 40 000 Parking fines 6 000 Business mileage claim: Kuda 24 000

Tonde 20 000 –––––––– 160 000



2. Administrative expenses comprise: US$

Salaries: Staff 40 000 Kuda 60 000 Tonde 60 000

Pension fund contributions: Staff 18 000 Kuda 10 000 Tonde 10 000

Insurance premium: Partnership joint life policy 8 000 Loss of profit 20 000

Partners life policies – Kuda 8 000 Tonde 5 000

Medical aid contributions: Staff 3 000 Kuda 6 000 Tonde 4 000

Depreciation 23 000 Repairs and maintenance 15 000

–––––––– 290 000

3. Other expenses comprise: US$

Interest on capital accounts: Kuda 16 000 Tonde 14 000

––––––– 30 000

The following is an extract from the fixed asset register for the year ended 31 December 2013:

Cost Income tax value US$ US$

Office premises 130 000 120 250 Office furniture and equipment 80 000 20 000 Passenger motor vehicles (2) 60 000 5 000

Required

a) Briefly explain, in general terms, how partnership income is taxed. (2 marks)

b) Calculate the joint partnership taxable income/(loss) for the year ended 31 December 2013. (6 marks)

c) Calculate the taxable income and income tax payable by both Kuda and Tonde for the year ended 31 December 2013. (7 marks)



Question 8 Solution

a) Taxation of partnership income

Partnership income is taxed in the hands of the individual partners in accordance with their profit sharing ratios. 1 mark

The partnership is not a taxable person. Instead each partner is required to report his/her share of the partnership’s taxable profit or loss in his/her individual tax return and pay income tax on this. 1 mark

b) Calculation of the joint partnership taxable income/(loss) for the year ended 31 December

2013 US$

Profit for the year 250 000 ½ Add: Parking fines 6 000 ½ Excess staff pension contributions (18 000 – (3 x 5 400) 1 800 1 Joint life insurance policy 8 000 1 Depreciation 23 000 ½ Less: 5% cost of fixed assets – Kuda (5% x 130 000 x 12) (78 000) ½

Tonde (5% x 80 000 x 12) (48 000) ½ Capital allowances – Office premises (2·5% x 130 000) (3 250) ½

Office furniture and equipment (25% x 80 000) (20 000) ½ Passenger motor vehicles (25% x 20 000) (5 000) ½

–––––––– ––– Joint taxable income 134 550 6

c) Calculation of the taxable income and income tax payable by the partners for the year ended 31 December 2013

US$ US$ Kuda Tonde Equal share of joint taxable income 67 275 67 275 ½ 5% fixed assets cost 78 000 48 000 ½ Business mileage claim 24 000 20 000 1 Business mileage claim – deductible (24 000) (20 000) 1 Salaries 60 000 60 000 ½ Pension contributions 10 000 10 000 ½ Maximum pension contributions allowable (5 400) (5 400) ½ Insurance life policy 8 000 5 000 1 Medical aid contributions 6 000 4 000 ½ Interest on capital accounts 16 000 14 000 1



–––––––– –––––––– Taxable income 239 875 202 875 Tax payable at 25% 59 969 50 719 1 Less credits Medical aid contributions – 50% (3 000) (2 000) 1 56 969 48 719 Add 3% AIDS levy 1 709 1 462 1 58 678 50 181



Question 9 : KKM Consulting Engineers 30 marks

During the 2010 year of assessment, three long-time university friends decided to consolidate their

respective engineering consulting businesses into a partnership. James Khumalo, Peter Kamoti and Able

Mathemba all traded as sole proprietors in the past, but due to work pressure and a lack of capacity,

they decided to form an equal partnership (profits and losses were shared equally between the three

partners).

The partnership was called KKM Consulting Engineers and operated from 1 September 2010. On 1

December 2013, Able Mathemba indicated that he would like to resign from the partnership on 1

January 2014 due to ill health. James Khumalo and Peter Kamoti decided to continue their relationship

in a partnership and would change the partnership’s name to KK Consulting Engineers. In the new

partnership, James would have a 60% interest and Peter a 40% interest. Profits and losses will be shared

in the ratio 60/40 between James and Peter.

KKM Consulting Engineers partnership is registered for VAT and all amounts exclude VAT unless

otherwise stated. James Khumalo is 58 years old and married out of community of property. Peter

Kamoti is 45 years old and unmarried. Able Mathemba is 49 years old and divorced.

The following information was made available by the bookkeeper of KKM Consulting Engineers as at 31

December 2013:

Pro-forma Income Statement for the year ended 31 December 2013 :

Notes Amount

Income

Turnover 1 135,000

Interest Received 2 1,250

Sundry Income 3 2,350

Total Income 138,600

Less: Expenditure (110,557)

Interest Paid 4 3,525

Salaries and wages 5 68,740

Bad Debts 6 1,587

General partnership expenses – all deductible 25,095

Lease Payments 7 3,835



Insurance 8 1,860

Subscriptions and membership fees 9 940

Removal Costs 10 1,050

Depreciation 11 2,200

Goodwill written off 525

Rent paid to Able Mathemba 12 1,200

NET PROFIT FOR THE YEAR 28,043

Notes:

1. Included in the turnover of $135 000 is an amount of $5 000 being the proceeds on the disposal of

partnership equipment. The equipment was originally purchased during the 2011 year of assessment for

$4 500 (excluding VAT) and had a tax value of $2 250 on the date of the disposal. Depreciation for the

2013 year of assessment is included in the amount reflected under Note 11.

2. The interest received consists of the following: $

Interest received on a money-market account..................................................................... 950

Interest received on outstanding debtors accounts ..........................................................…. 300

Total 1 250

3. The sundry income consist of the following: $

Dividends from Zimbabwean companies........................................................................ 1 000

Loan repayment from an employee..................................................................................... 550

Commission received from a foreign company.................................................................... 800

Total 2 350

4. Interest paid consists of the following: $

Interest on capital account: James Khumalo.................................................................... 900

Interest on capital account: Peter Kamoti.......................................................................... 900

Interest on capital account: Able Mathemba...................................................................... 900

Interest on bank overdraft.................................................................................................... 325

Interest paid to the Zimbabwe Revenue Authority............................................................ 500

Total 3 525

5. Salaries and wages consist of the following: $

Salaries and wages – personnel........................................................................................ 26 740



Salary: James Khumalo...................................................................................................... 14 000

Salary: Peter Kamoti........................................................................................................ 14 000

Salary: Able Mathemba.................................................................................................... 14 000

Total 68 740

6. Bad debts consist of the following: $

Mr X – a normal trade debtor that was declared insolvent during June 2013

(excluding VAT - see below) ................................................................. 987

Mr Y – a loan granted to an employee who passed away on 19 September

2013................................................................................................ 600

Total 1 587

The trade debtor originated during October 2012 when KKM Consulting Engineers provided consulting

services to Mr X.

7. Lease payments Lease payments of $3 835 were paid to James Khumalo for the 2013 year of

assessment.

On 1 January 2013, James Khumalo bought a vehicle that he intended to lease to the Partnership

business. The cash cost of the vehicle was $20 520 (excluding VAT). During the 2013 year of assessment

James used this vehicle exclusively for Partnership business and in return received the lease payments

noted above.

8. Insurance expenditure consists of the following: $

Premium for loss of profits due to fire................................................................................ 1 200

Life insurance paid on behalf of James Khumalo................................................................ 660

Total 1 860

9. Subscriptions and membership fees include the following: $

Engineering Council of Zimbabwe.................................................................................... 240

ZW Engineer – Monthly journal.......................................................................................... 280

Royal Bowls Club – Peter Kamoti..................................................................................... 180

Golden Golf Club – James Khumalo.................................................................................... 240

Total 940

10. Removal costs include the following: $

Transport cost to relocate equipment to new rental premises (see below) ......................... 750

Removal of rubbish from James Khumalo private residence................................................. 300

Total 1 050



The transport cost to relocate the partnership equipment to the new rental premises was paid on 1

November 2013.The equipment was purchased new on 1 March 2011 for $3 750 (excluding VAT).

11. Depreciation $

Depreciation on equipment (5 years straight-line method) ................................................. 750

Depreciation on disposed equipment................................................................................. 900

Depreciation on furniture (5 years straight-line method) .................................................... 550

Total 2 200

All the furniture was purchased on 1 September 2010 for a total cost of $2 750 (excluding VAT). The

equipment referred to above was purchased in 2011 for an amount of $3 750

12. Rent paid The rent paid of $1 200 to Able Mathemba is for the use of office equipment, which he did

not want to bring into the partnership when it was formed on 1 September 2010. Abel had bought the

equipment in 2010 for an amount of $9 000 and was used new by the partnership business


I. Calculate the net profit/ (loss) for KKM Consulting Engineers partnership for income tax

purposes in order to determine the taxable income of the three partners. Commence your

calculation with the accounting profit of $28 043 for the 2013 year of assessment.(Assume the

Partnership has always claimed the maximum possible tax allowances) – 12 marks

II. Calculate the taxable income of the individual three partners (James, Peter and Able) for the

2013 year of assessment. If a specific item (income or expense) should be excluded or ignored

from the calculation of the taxable income, full reasons should be provided. – 18 marks




PART A

Details $ $ Marks

Net Profit for the year 28 043

Proceeds on disposal of Equipment – Accounting Entry (5 000) 1

Recoupment on disposal ($4 500 - $2 250) – Note recoupment

is limited to capital allowances previously granted - sec 8 (1) (j)

2 250

1

Interest received : on money market account (Exempt)- 3rd

schedule

(950)

1

Interest received on o/s debtors : Gross Income sect 8 -

Sundry Income

Dividends from Zimbabwean companies : exempt (1 000) 1

Loan repayment from employee : Capital in nature (550) 1

Commission received from foreign company: Gross Income (

deemed source is Zimbabwe)

-

Interest Paid

Interest on capital accounts - deductible

-

Interest on bank overdraft – deductible -

Interest paid to ZIMRA – prohibited deduction- not for trade 500 1

Salaries – deductible (Sect 15) -

Bad debts: Mr X (incurred in the furtherance of trade) -

Bad debts: Mr Y (Capital in nature hence not deductible) 600 1



General partnership expenses - -

Lease payments - deductible -

Insurance – loss of profits due to fire (Partnership beneficiary

hence not deductible) – sec 15

1 200

1

Life insurance James Khumalo – James beneficiary hence

deductible sec 8

-

Subscriptions - deductible -

Removal costs -

Depreciation – accounting entry 2 200 1

Capital Allowances - sec 15 (2) ©

Equipment: Acc W&T ($3 750 * 25%) (938) 2

Furniture: Acc W&T ($2 750 * 25%) (688) 2

Rent paid sec 15 -

Goodwill written off- Capital in nature sec 15 500 1

Taxable Income 26 167

12



PART B

Details James Peter Able Marks

$ $ $

Share of taxable Income ($26 167/3) 8 722 8 722 8 722 2

Add Interest on Capital Accounts 900 900 900 1

Salary 14 000 14 000 14 000 2

Lease payments 3 835 1

Life Insurance 660 1

Subscriptions – Private expenditures 240 180 1

Removal costs 300 1

Rent 1 200 1

28 657

23 802

24 822

Less Deductions

Capital Allowances on leased vehicle : ($20 520 * 20% *

9 385/27 385) (1 406)

3

Life insurance – not allowable (private expenditure) - 1

Subscriptions – not to professional bodies hence not

deductible - -

1

Removal costs – private expenditure hence not

deductible -

1

Capital allowances: Furniture ($1 200 * 25%) (300) 2

Taxable Income 27 251 23 802 24 522

18



Question 10: ICAZ Adapted, ITC Jan 2011 Paper 4 Question 2

You are a tax consultant and one of your clients is Midlands (Pvt) Ltd (‘Midlands’), a Zimbabwe registered company, which owns a licensed hotel. Midlands entered into a contract with another Zimbabwe registered company, Nashen (Pvt) Ltd (‘Nashen’), to provide accommodation and meals on a bed and breakfast basis to some of its employees for a six-month period. During September 2013 these employees, after having stayed at the hotel for only two months, absconded after causing extensive damage to the hotel rooms that they had occupied. Midlands sought legal advice on the matter and based on this advice, threatened to sue Nashen unless it settled a claim for damages amounting to $600 000. This claim consisted of the following:

$

Meals and accommodation 170 000

Damage to the hotel rooms 230 000

Loss of goodwill which Midlands had suffered as a result of the events that

led to the claim

200 000

Total claim 600 000

On 15 November 2013 the parties agreed to settle the matter out of court and Nashen paid Midlands $300 000. In return, Midlands undertook to abandon first any rights it may have had for damages and second any pending or contemplated court action against Nashen. The parties agreed that the $300 000 represented 50% of each of the three items in the original claim.



During the year ended 31 December 2013 Midlands had the following additions to its fixed assets:

$

A second-hand Toyota Venture vehicle purchased in May 2013 to be used as

a courtesy car, costing

12 000

An industrial washing machine which was delivered on 31 December 2013

but was only connected in the laundry on 3 January 2014, costing

1 320

A tennis court constructed in April 2013 at a cost of 5 200

All other assets owned by the company had been fully depreciated and had a nil income tax value on 1 January 2013. The company presented the following income and expenditure account for the year ended 31 December 2013 to you:

Notes $ $

Income

Revenue from accommodation, meals and liquor sales 2 250 000

Payment from Nashen 300 000

Dividend from a local company 1 200

Expenditure

Allowable expenditure, electricity ,water, rates, salaries,

wages, etc.

550 000

Entertainment 2 2 670

Provision for specific bad debts which had all been

incurred during the year

5 675

Provision for specific directors’ fees to be voted in

January 2014

4 000



Provision for additional repairs to be carried out in 2014 36 220

Provision for plumbing costs 145

Legal fees 3 550

Repairs to rooms damaged by Nashen’s employees 112 000

Loan interest 1 2 860

Total expenditure 714 120

Profit for the year 1 837 080

2 551 200 2 551 200

Notes 1 The interest on loans was used as follows:

$

To fund general working capital 1200

To pay a dividend declared to shareholders 600

To purchase shares in a local company 1060

2860

2 Entertainment

$

Entertainment allowance paid to managing director 1440

Entertainment of overseas travel agents 1230

2670



3 Midlands incurred legal expenses, occurred while obtaining advice on the Nashen claim:

$

Claim for meals, accommodation and damage to property 300

Claim for goodwill lost 250

550

QUESTION 2 REQUIRED Marks

(a) Discuss, in the form of a list and with reference to case law and legislation, whether

the payment from Nashen is wholly or partially subject to income tax.

7

(b) Prepare an income tax computation for the year ended 31 December 2013,

commencing with profit for the year of $1 837 080, and calculate the company’s

normal tax liability, if any. In your solution you should give brief reasons for the

inclusion/exclusion of accruals and expenditure.

19

(c) State the dates when any tax liability should have been paid. 4

Presentation marks: Arrangement and layout, clarity of explanation, logical argument

and language usage.

2



QUESTION 10 : Suggested Solution

a) Damages receipt of $200 000 Mark The pertinent question to be answered is whether the damages receipt of $200 000 (or part thereof) is of a capital or revenue nature.

1

Should the receipt (or part thereof) be of a capital nature it is excluded from the gross income definition but may have capital gains tax (CGT) consequences?

1

It is submitted the receipt of $300 000 can be separated into its component parts as contractually agreed by the relevant parties. Each component of the claim therefore needs to be considered.

1

The courts have held that damages and compensation receipt will be of a capital nature if the payment is for the loss or sterilisation of the taxpayer’s capital asset (i.e his income producing machine). However if the payment is made for the compensation of loss of profits it will be of a revenue nature in the hands of the recipient. As was said in the Burmah Steam Ship Co case (bonus mark for mentioning the case) “is the receipt to fill a hole in profits or in fixed capital assets”.

1 1 1

The part of the receipt relating to meals and accommodation is compensation for loss of profits and of a revenue nature and included in gross income.

1

The part of the receipt relating to repairs is a recoupment of section 15 2 (b) expenses claimed and is included in gross income.

1

It is submitted that goodwill is generally an asset of a capital nature and the proceeds from disposal of goodwill will be of a capital nature.

1

Thus it is submitted that the damages receipt relating to the loss of goodwill is of a capital nature.

1

Maximum Available 10



b) Midlands (Pvt) Ltd Income Tax Computation

$ Mark

Plan

Profit for the year 1 837 080 ½

Payment from Nasheem

Meals and accommodation – no adjust refer to part a 0 ½

Damage to the hotel rooms – no adjust 0 ½

Loss of Goodwill : Capital refer above (100 000) ½

Dividend from local company – exempt 3rd schedule (1 200) 1

Expenditure

Allowable expenditure 0 ½

Entertainment

Entertainment allowance paid to managing director –

prohibited sect 16 (1) (m)

1 440 1

Entertainment of overseas travel agents – prohibited sec

16(1) (m)

1 230 1

Provisions

Provision for specific bad debts – not allowable since it’s a

provision

5 675 1

Provision for specific directors’ fees to be voted in January

2014 – sec 15 ( the amounts is deductible since the

expenditure in respect of directors services was incurred

during 2013)

0 2

Provision for additional repairs – not yet incurred 36 220 1

Provision for plumbing costs – not yet incurred 145 1



Legal fees

Claim for meals, accommodation and damage to property –

incurred in respect of revenue receipts

0 1

Claim for goodwill lost – incurred in respect of capital receipts

therefore not deductible

250 1

Other

Repairs to rooms damaged by Nashen’s employees –

deductible sect 15 (2)(b)

0 1

Interest

To fund general working capital – deductible since incurred

to fund revenue expenses

0 1

To pay a dividend declared to shareholders – not for the

purposes of trade

600 1

To purchase shares in a local company – incurred in funding

capital expenses therefore not deductible

1 060 1

Capital Allowances

Toyota Venture - $12 000 * 25% (not a passenger motor

vehicle as defined)

(3 000) 1

Industrial washing machine – capital allowances only claimed

when machine is brought into use

0 1

Tennis court- part of the hotel which is an industrial building

as defined - $5 200* 25%

(1 300) 1

Total Taxable Income 1 778 200

Tax @ 25.75% 457 887 1



c) Midlands should have paid their tax liability on the following dates:

25 March 2013

25 June 2013

25 September 2013

20 December 2013

ICAZ CTA TAXATION TUTORIAL 102: PRESENTED BY · PDF fileICAZ CTA TAXATION TUTORIAL 102:...

Documents

Transcript of ICAZ CTA TAXATION TUTORIAL 102: PRESENTED BY · PDF fileICAZ CTA TAXATION TUTORIAL 102:...